Striking Gold in Stock Options

As the stock market dived in late 2008 and early 2009, chief executives of the biggest American companies received their annual grants of stock and options, and the timing couldn’t have been better.

The subsequent rally has benefited nearly all investors, but for a select group of C.E.O.’s who were fortunate enough to get options, it has created a windfall. And while much of the attention has focused on the pay for executives at banks, a sector that enjoyed a back-from-the-dead performance last year, many of the biggest winners from options were C.E.O.’s at nonfinancial companies.

Some executives on the top rungs of corporate America, including Alan Mulally of Ford Motor, Howard Schultz of Starbucks and Andrew Liveris of Dow Chemical, have seen the value of their 2009 options packages double, triple and quadruple — and, in Mr. Mulally’s case, jump nearly 10 times in value, to more than $50 million.

In most cases, they can’t cash in now: options typically take three to four years to fully vest. But the gains have set off renewed criticism that C.E.O. compensation is out of control, especially in a year plagued by the recession and high unemployment.

“You’re going to see big numbers and people are going to squawk about it, as they should,” said Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “There was concern at the time about unjustified returns, and that’s what happened. They clearly took advantage of the timing.”

Not so fast, say other pay experts, who argue that the first quarter, and occasionally the fourth quarter, are typically the time when stock and option grants are made, regardless of how the stock market is performing.

“They had no way to know the market would begin to recover in March,” said Carol Bowie, head of the governance institute at the RiskMetrics Group, a financial analytics company. “The fact of the matter is that many, many companies grant awards at the beginning of the year. It turned out to be an opportune time, but it’s not necessarily untoward.”

Nevertheless, the outsize gains from stock and options last year are likely to fuel what’s already a fierce debate about executive pay levels.

What’s more, companies like Ford, Starbucks, Dow, Whirlpool and American Express were making deep job cuts even as they showered options on their chief executives.

“It reinforces the view that the rules of the game are rigged and that no matter what these guys do, they always come out ahead,” said Sarah Anderson, who tracks executive pay at the Institute for Policy Studies, a liberal research group in Washington. “In a time of national crisis, it wasn’t appropriate to be giving out boatloads of new stock options.”

For all the criticism of the options windfall, it’s worth noting that some pay experts have argued for years that chief executives should receive more options and stock, rather than cash, in order to link their pay to long-term corporate performance.

But in a twist, the options packages have proved incredibly lucrative in the short term. The gains, Mr. Elson said, weren’t based on corporate performance but simply reflect the broad market rebound.

AMONG 200 C.E.O.’s of companies tracked by Equilar, an executive compensation research firm that analyzed data for The New York Times, the biggest beneficiary of an options grant and subsequent stock market rally was Mr. Mulally at Ford.

Photo

Alan MulallyCredit
Annie Marie Musselman for The New York Times

On March 11, 2009, two days after the Dow Jones industrial average hit a 12-year low of 6,547, Mr. Mulally received options to buy five million shares of Ford at $1.96, which the company estimated would be worth just over $5 million, using a complicated formula to predict their eventual value. The company usually grants options in March.

A year later, the market is up more than 60 percent, but Ford shares are worth nearly 10 times what they were then, making Mr. Mulally’s options worth an estimated $53.3 million, according to Equilar. Mr. Mulally was eligible to receive the first batch on March 27 — worth more than $17 million — and is set to receive the rest within two years.

Defenders of Mr. Mulally argue that Ford was the only one of the Big Three automakers not to file for bankruptcy last year; it actually earned a profit for the full year. But critics say an award of that size is still inappropriate, especially given the huge job cuts at Ford over the last few years.

“The sector is going through hard times,” Ms. Anderson said. “For workers, it’s demoralizing to see that kind of money going into executives’ pockets when jobs are being cut.”

A spokesman for Ford, Mark Truby, said Mr. Mulally’s options award was based on Ford’s long-term performance. “The ultimate value of these options will depend on how Ford’s stock performs over the next two years,” he said. Mr. Mulally, he added, took a 30 percent cut in salary in 2009 and 2010, and did not receive a cash bonus for 2008 and 2009.

“The vast majority of his compensation is at risk and tied directly to the performance of the company and the stock,” Mr. Truby said.

A corporate comeback and great timing also drove gains of the second-biggest options winner among the executives in the survey: Mr. Schultz of Starbucks.

Mr. Schultz built his company into a nationwide brand and oversaw its explosive growth in the 1990s but stepped down as chief executive in 2000. In early 2008, he returned to the top amid flagging earnings and complaints that Starbucks had lost its way.

On Nov. 17, 2008, as Starbucks shares neared lows not seen since the beginning of the decade, he received options to buy 2.7 million shares at $8.64 as part of his 2009 compensation, in an award the company estimated would eventually be worth $12.4 million.

It was a painful period for the company — in early 2009, Starbucks announced it would cut thousands of jobs and close 300 stores — but the fortunes of the chain and Mr. Schultz have improved greatly since then. Thanks to more traffic in the stores and renewed earnings growth, shares of Starbucks have risen above $24 a share, making his options package worth $42.3 million.

It’s a venti-size gain, though he will have to wait four years for the options to fully vest. In a statement, the company defended the award.

“Mr. Schultz led the company in numerous initiatives that resulted in permanent improvements throughout the business,” Starbucks said. “Starbucks’ stock price has increased significantly to the benefit of all Starbucks shareholders.” The company also said the timing of Mr. Schultz’s award was set long before Starbucks’ shares reached new lows.

It wasn’t just the surging stock prices that created huge paydays for some executives. As share prices declined, said Mr. Elson of the Center for Corporate Governance, many companies pumped up the number of options they doled out to make up for any possible loss in value.

For example, James M. Cracchiolo, the C.E.O. of Ameriprise Financial, received an options package worth $9.1 million in 2009, nearly identical to the value of his options award in 2008. But instead of giving him options on 656,535 shares as it did in 2008, the board gave him options on more than a million shares last year. (The company’s stock had declined to $21.34 from $52.86.)

Photo

A corporate comeback and great timing drove option gains of Howard Schultz, Starbucks' C.E.O.Credit
Annie Marie Musselman for The New York Times

“Everything fell dramatically, but to make up for the fall, they loaded up in stock,” said Mr. Elson. “They ended up benefiting from the bear market.”

Indeed, the projected value of Mr. Cracchiolo’s 2009 options package has nearly tripled, and now totals more than $25 million. A spokesman for Ameriprise declined to comment.

Some options packages had a lower price tag than in past years, but the executives were still getting a raise: the number of shares soared, setting up outsize paydays. Although the estimated value of the options package awarded to Craig A. Dubow, the C.E.O. of Gannett, declined to $585,000 in 2009 from $817,800 in 2008, the number of underlying shares more than doubled, to 500,000 from 235,000.

It was a worthwhile trade-off. Like many media companies, Gannett has been hit by the recession and migration of ad dollars from newspapers to the Internet. But its stock has rallied from lows of last year after cost cuts aided profitability. With its shares trading at $16.70— up from $3.75 when the options were granted in February 2009 — Mr. Dubow’s options package is worth $6.5 million, more than 10 times the initial valuation.

For Richard K. Templeton, the C.E.O. of Texas Instruments, total compensation of $9.9 million in 2009 barely budged from his overall pay in 2008. But he, too, benefited from a big increase in the number of options doled out.

The estimated value of his 2009 options award — $3.6 million — was one-third more than the one in 2008, but the number of underlying shares jumped from 270,000 to 664,461. That package is now worth $6.4 million.

A spokeswoman for Texas Instruments responded that the increase in value came from a rise in the stock price, not simply more shares, and that all employees with options grants benefited from that, not just Mr. Templeton.

Unlike past market rallies, when technology and financial companies soared but industrial names languished, this one has had big winners among old-economy names like Dow Chemical and Whirlpool. And the bigger the stock bounce, the faster the value of the options appreciated.

For Mr. Liveris of Dow Chemical, that meant an options package that has jumped nearly eight times in value, to nearly $19 million from $2.4 million in February 2009. The options grant for Jeff M. Fettig of Whirlpool has risen in value to $16.8 million from $1.9 million.

These gains came on the heels of big job cuts, though, with Dow and Whirlpool each eliminating roughly 5,000 jobs in 2009. The companies declined to comment.

AMERICAN EXPRESS doled out another rich options package, even as it cut 4,000 jobs last year and got financial help from the government in the financial crisis. The 2009 options of its C.E.O., Kenneth I. Chenault, are now worth $29.9 million, up from $3.9 million when awarded in January 2009.

A spokeswoman for American Express declined to comment but cited its proxy, which notes that it was the single best performer last year among the Dow Jones industrials, delivering a 125 percent return to shareholders.

American Express was also among the first financial firms to repay the federal aid, the proxy said, with the Treasury winding up with a 26 percent gain.

Given the stock market’s rapid run-up since March 2009, it’s unlikely that future options awards will prove as lucrative as they were last year. But the options packages of 2009 will most likely be a gift that keeps on giving as they vest between now and 2013.

“C.E.O.’s are looking at big gains,” said Aaron Boyd, head of research at Equilar. “Even if stock prices stay level for the next couple of years, some of these executives are still going to get a large payout.”

A version of this article appears in print on April 4, 2010, on page BU1 of the New York edition with the headline: Striking Gold in Stock Options. Order Reprints|Today's Paper|Subscribe